National Institute of Technology Calicut Department of Mechanical Engineering

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Logistics Management Definition: Logistics is the process of planning, implementing and controlling the procurement, movement and storage of materials, parts and finished inventory (and the related information flows) through the organization and its marketing channels for the purpose of conforming to customer requirement in such a way that current and future profitability are maximized.

• It is concerned with the positioning and synchronized flow of inventory throughout a firm’s supply chain.

• It creates value by achieving time-definite product delivery at the least total cost.

• Using state-of-the-art technology to integrate order processing, transportation, inventory, warehousing, materials handling and packaging, logistics is a continuous process focused on achieving maximum customer satisfaction.

• The scope of the logistics spans the organization, from the management of raw materials through to the delivery of the final product.

• It links between the market place and the operating environment

• Logistics management meets the needs of the customers through the co-ordination of the materials and information flows that extend from the marketplace, through the firm and its operations and beyond that to suppliers

• Components of an Integrated Logistics System

Physical Supply: links suppliers to operations process

Internal Operations: manages in-process material flow

Physical Distribution: links operations process to customers

• Recent decades the organizations are increasingly focusing internally to tap the opportunities existing within the organization to have improved cost competitiveness and manufacturing management

Requirements information flow

Material Flow

Procurement Operations Distribution Customers Suppliers

Fig 1: Logistics Management Process

National Institute of Technology Calicut Department of Mechanical Engineering

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• Procurement is getting growing recognition and it plays a critical role in creating and sustaining competitive advantage

• Leading edge organizations now routinely include supply-side issues in the development of their strategic plans

• Major opportunity for leveraging the capabilities and competencies of suppliers through closer integration of the buyer’s and supplier’s logistics process

• Logistics seeks an integrative concept that has a system vide view of the firm It is a planning concepts that creates a framework through which the needs of the

marketplace can be translated into a manufacturing strategy and plan, which in turn links into a strategy and plan for procurement

That is, a single plan which replaces the separate plans for marketing, distribution, production and procurement

Purchasing Encompasses the essential activities associated with the acquisition of the material, services, and equipments used in the operations of an organization.

Major activities:

• Co-ordination with user departments to identify purchase needs

• Discussions with sales representatives

Functions at Loggerheads Decades back each function is trying to have their best in their field. For instance manufacturing priorities and objectives have typically been focused on operating efficiency, achieved through long production runs, minimized set-ups and change-overs and product standardization. On the other hand marketing has sought to achieve competitive advantage through variety, high service levels and frequent product changes. These mutually destructive disputes are counter-productive to the achievement of overall corporate goals.

New approaches Recent decades are a period of rapid introduction of flexible manufacturing systems (FMS), new management practices (systems) to inventory management based on Material Requirement Planning (MRP), Just-In-Time (JIT) methods, and Lean production concepts – most recent one is Agile manufacturing and perhaps most important of all is sustained emphasize on quality. In the information integration and planning the organization has gone further into Enterprise Resource Planning (ERP) systems.

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• Identification of potential suppliers

• Conduct of market studies for important materials

• Negotiation with potential suppliers

• Analysis of proposals

• Selection of suppliers

• Issuance of purchase orders

• Administration of contracts and resolution of related problems

• Maintenance of a variety of purchasing records

Procurement It includes the supply activities such as

• Participation in the development of material and service requirements of and their specifications

• Conduct of materials studies and management of value analysis activities

• Conduct of more extensive material market studies

• Conduct of all purchasing function activities

• Management of supplier quality

• Purchase of inbound transportation

• Management of investment recovery activities (Salvage of surplus and scrap)

Supply Management Supply management is a process responsible for the development and management of a firm’s total supply system – both internal and the external components

It has strategic focus

Activities generally include:

• Early purchasing involvement and early supplier involvement in product design and subsequent specifications development for important items, typically through the use of cross functional teams

• Conduct of all purchasing functions and procurement process activities

• Heavy use of cross-functional teams in supplier qualification and selection

• Heavy use of purchasing partnering arrangement and strategic alliances with suppliers – value chain, cost and quality-at-source

• Continuous identification of threats and opportunities in a firm’s supply environment

• Development of strategic, long-term acquisition plans for all major materials

• Monitoring of continuous improvement in the supply chain

• Active participation in the corporate strategic planning process

National Institute of Technology Calicut Department of Mechanical Engineering

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Supply Chain Management • A supply chain consists of all stages involved, directly or indirectly, in fulfilling a

customer request

• Supply chain includes the manufacturer – all functions involved in filling a customer request, suppliers, transporters, warehouses, retailers and customers

• A supply chain is dynamic and involves the constant flow of information, product, and funds between different stages

• Each stage of the supply chain performs different processes and interacts with other stages of the supply chain

• An example: When a customer purchases on-line from Dell Computers, the supply chain includes, the web page that take the customer’s order, the Dell assembly plant, all of Dell’s suppliers and their suppliers

• A company’s supply chain contains geographically dispersed facilities where raw materials, intermediate products, or finished products are acquired, transformed, stored, or sold and transportation links that connect facilities along which products flow.

• Facilities: these may be operated by the company, or they may be operated by vendors, third party providers, or other firms with which the company has business arrangements

• Company’s goal is to add value to its products as they pass through its supply chain, and transport them to geographically dispersed markets in the correct quantities, with correct specifications, at the correct time, and at a competitive cost

• A supply chain often represented as a network as shown in figure 2

• Nodes in a network represent facilities which are connected by links that represent direct transportation connections permitted by the company in managing its supply chain

• Figure 2 represents only a high-level view of a supply chain

• For meaningful analysis requires additional details about transformation activities and processes, resources, capacities, and costs that describe facilities and transportation links

• Products (material) flow downstream from tier 1 vendors to tier 2 vendors, plants to distribution centres, and distribution centres to markets

• A supply chain network may have an arbitrary number of levels

• Supply chain: material flow direction Generally products flow downstream (from vendors to markets in a forward

supply chain) In a reverse supply chain or backward supply chain – Post consumed goods

are returned from markets to distribution centres for recycling and reuse by plant

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Fig 2. Supply chain network structure

• Supply chain is the network of organizations that are involved through upstream and downstream linkages, in the different processes and activities that produce value in the form of products and services in the hands of the ultimate consumer

Fig 3: A supply chain

• The real competition is not company against company but rather supply chain against supply chain

• The focus of supply chain management is upon the management of relationships in order to achieve a more profitable outcome for all parties in the chain

• It is different from “vertical integration’ – Ownership of upstream suppliers and downstream customers

• Organisations are moving from this to ‘core business’ – things organisations can do really well and where they have a differential advantage; everything else is ‘out-sourced’ – procured outside the firm

Vendor Tier 1 Vendor Tier 2 Plant Distribution Centres Markets

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Fig 4: Supply chain structures

Serial structure

Convergent structure

Divergent structure

Conjoined structure

Network (general) type

Dyadic structure

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• Distinction between Logistics and Supply Chain Management Logistics is essentially a planning orientation and framework that seeks to create a

single plan for the flow of product and information through a business

Supply chain management builds upon this framework and seeks to achieve linkage and co-ordination between processes of other entities in the pipeline, i.e. suppliers and customers and the organisation itself

An Example:

One goal of supply chain management might be to reduce or eliminate the buffers of inventory that exist between organisation in a chain through the sharing of information on demand and current stock levels – ‘Co-Managed Inventory’ (CMI)

Focus of supply chain management is on co-operation and trust

Recognition that properly managed ‘the whole can be greater than the sum of its parts’

• Supply chain management philosophy The entire supply chain is single, integrated entity

The cost, quality and delivery requirement of the manufacturing customer are objectives shared by every company in the chain

Inventory is the last resort for resolving supply-and-demand imbalance between the tiers

• Supply chain management refers to integrated planning Possible integrations are (i) Functional integration (ii) Spatial integration (iii) Intertemporal integration or hierarchical planning

Functional integration of purchasing, manufacturing, transportation, warehousing, and inventory management activities

Spatial integration of functional activities across geographically dispersed vendors, facilities, and markets

Intertemporal integration of functional activities over strategic, tactical and operational planning horizons

• Today integrated planning is possible due to advances in information technology (IT)

• But most companies still have much to learn about implementing new analytical tools (models) needed to achieve integrated planning

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The following study shows the importance of logistics and supply chain management as it shows the proportion of cost from logistics and supply chain related activities. A study by A.T. Kearney & Company provides the average distribution cost (as a percentage of sales) across 270 companies.

Functional Activity % of sales

Administration 2.4

Transportation :

Inbound 2.1

Outbound 4.3 6.4

Receiving and shipping 1.7

Packaging 2.6

Warehousing 3.7

Inventory carrying cost:

Interest 2.2

Taxes, insurance, obsolescence 1.6 3.8

Order processing 1.2

Total 21.8%

Core competency • It is what a company’s customers most recognise about it

• Current trend is that organisations increasingly compete through their capabilities and competencies

• Organisations create superior value for customers and consumers by managing their core processes better than competitors mange theirs

• Core process encompasses such activities as new product development, supplier development, order fulfilment and customer management

• Organisations take advantage of supplier’s competencies and be free to concentrate its own resources on further developing critical skills and capabilities for its own areas of competency

• This can be called ‘deintegration’

• This kind of ‘outsourcing’ emphasizes the importance of supply chain management

• During outsourcing organisations should be careful, as own core competency can be mistakenly outsourced

National Institute of Technology Calicut Department of Mechanical Engineering

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Value Chain • The value chain is a systematic approach to examine the development of competitive

advantage

• The chain consists of a series of activities that create and build value

• The value chain concept suggested by Michael Porter helps in identifying suitable strategies that will provide superior value in the eyes of the customer

• A firm performs many discrete activities such as designing, producing, marketing, delivering and supporting its product

• Each of these activities contributes to a firm’s relative cost position and create basis for differentiation

• Value chain disaggregates a firm into its strategically relevant activities in order to understand the behaviour of costs and potential sources of differentiation

• A firm gains competitive advantage by performing these strategically important activities more cheaply or better than its competitors

• Value chain activities can be categorised into two types – primary activities and support activities (see figure 5)

• Support activities are integrating functions that cut across the various primary activities within the firm

• Perform all these activities efficiently than the competitors or perform in a unique way that creates greater differentiation

Supp

ort a

ctiv

ities

Margin

Technology development

Firm infrastructure

Human resource management

Procurement

Inbound logistics Operations Outbound

logistics Marketing and sales Services

Primary activities

Fig 5: The Value chain